Are you a good steward of your money?

Recently I read this book Creating Wealth by Robert G. Allen; it talks about the seven principles of wealth. One of them I wish to highlight is Wealth Principle 4: Wealth seekers are always on the offensive, not defensive.

Most people are concerned with security, especially with money. Whenever when faced with risk, failure or debt, they tend to go for low-yielding “safe” investments. You need to understand that these kinds of investments don’t produce wealth. Most average investors believe that the worst thing that can happen to them is losing their capital, they are so afraid that they focus their money on the defensive. He is more concerned with saving money, buying ILP or Unit Trusts rather than more lucrative investments.

There is a famous parable in the Bible call “The Parable of the Talents” in Matthew 25:14-26:

14"Again, it will be like a man going on a journey, who called his servants and entrusted his property to them. 15 To one he gave five talents of money, to another two talents, and to another one talent, each according to his ability. Then he went on his journey. 16 The man who had received the five talents went at once and put his money to work and gained five more. 17 So also, the one with the two talents gained two more. 18 But the man who had received the one talent went off, dug a hole in the ground and hid his master's money.

19"After a long time the master of those servants returned and settled accounts with them. 20The man who had received the five talents brought the other five. 'Master,' he said, 'you entrusted me with five talents. See, I have gained five more.'

 21"His master replied, 'Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master's happiness!'

 22"The man with the two talents also came. 'Master,' he said, 'you entrusted me with two talents; see, I have gained two more.' 

 23"His master replied, 'Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master's happiness!' 

 24"Then the man who had received the one talent came. 'Master,' he said, 'I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. 25 So I was afraid and went out and hid your talent in the ground. See, here is what belongs to you.' 

 26"His master replied, 'You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed? 

The Lord gives five talents to one servant, two talents to another and one talent to another. Upon returning, the master found out that two of his servants have done very well with their “investments.” But the last one was afraid, he took the talent and buried it in the ground, all because he did not want to take risk! God’s words are explicit, he reprimanded the last servant for not being a good steward of this money. Instead of making it grow, he chose to invest the money in bank, or maybe in his safe?

The profitable servants is on the offensive, they were willing to risk to make their money grow, the unprofitable servant is on the defensive. He only wish to preserve, to protect and therefore he did not grow his assets.

But is there a place for defence? Of course, any soccer coach can tell you that a good team must be balanced with both offensive and defensive units. But still, the best defence is a good offense.

Concept of Wealth from Rich Dad

The book Rich Dad Poor Dad by Robert Kiyosaki is an astounding book, it changed certain mindsets I have about building wealth. It is highly recommended especially if you are just starting out. But be warned, the ideology behind it might offend you and you might not agree with it. In fact, most of the principles taught in the book contradict what my parents taught me. Let’s look into some of it:

The Rich don’t work for Money

If you ask most people what is the most important thing in order to build wealth, most of them will tell you the answer is having a good JOB, a great JOB. On the contrary, a wealthy person begs to differ. Having a job is important, but that alone certainly cannot make you wealthy. To a wealthy person, a job is temporary. It helps you in the initial stage of your wealth building plan by generating cash for you to accumulate them in order to propel your portfolio on auto pilot mode (passive income). In fact, the rich believe in money working for them, not the other way around.

It is commonly held in our society that finding a good job, working hard and moving up the corporate ladder will lead us to wealth. But having a job merely supports our necessities (food, shelter). There is a quote saying “Wealth is when small efforts produce large results. Poverty is when large efforts produce small results.”

So the key is not work harder, but work smarter. Your goal is to acquire assets that can generate passive income and in a long run, you ought to be wealthy!

Stacking up your assets

What do you considered as an asset? They are things that can generate income or go up in value. Some good examples of assets are:

• Real Estate
• Stocks
• Bonds
• Unit Trust

Why assets are so important?

A true asset is where your money is working for you and provides you with cash flow. The more assets you have, the more your cash flow grows. As long as your expenses and liability is less than your asset-produced cash flow, you are growing richer. And with that, it can set you up on auto pilot mode which ultimately leads you to financial freedom!

Looking at a simplified version of an income statement, you can understand the differences between the rich and the not-so-rich.

Let’s take John, a fresh graduate as an illustration. John works in a MNC with above average income as compared to other graduates. Every month, after paying off his tax, bills and spending on his wants and necessities, he is happy because he has got more than enough. So he decided to buy a Honda Civic. Few years later, he met his dream girl and got married. At first, everything seemed okay. With the income from John and his wife, they decided to buy a house with a 25 year loan.

Soon after they bought the house, their first child was born and his wife decided to be a housewife. John soon realized that his expenses are catching up and the money that he is earning is not enough to cover his expenditures, worse still, if the second child comes along. His car expenses and mortgages are killing him. With much consideration, he decided to sign up for night classes hoping to get promoted in his job. Few months later, his boss decided to promote him because of his hard work and productivity. But things aren’t getting any better. Soon after that, his second child was born. Expenses are rising and he decided to get another job to support his family.

Sooner or later, John realized that he is stuck in the infamous rat race. The harder he work (and having higher pay), the higher the expenses due to higher tax and higher spending. As you can see from the diagram above, the cycle repeats itself.

Let’s look at the income statement of a high income group. Another illustration is Peter. Peter just got out from the Army, and with a diploma cert, he found a job in a local company. His pay was not that bad as a diploma holder. Every month, with the money he earned, he set aside a certain amount of money first then pays off his tax, bills and necessities. With the remaining cash, he then spends that little money on his wants. With the amount of money he accumulates every month, he went on to buy assets such as stocks and bonds.

After a few years, he began acquiring properties and renting them out. The income generated from his assets surpasses the income from his job. On top of that, his expenses are being paid off by the income generated from his assets. After he got married, he realized he can choose not to work and still have more than enough money in his pocket. He set up a business and invests part of his money into it. A year later, the business grew and he decided to employ staffs to take over his business while he enjoys the reaping of his profits and have enough time to spend with his family.

As you can see, the initial stage might be tough, but after you kick off and set yourself on autopilot mode, you can have all the freedom you want! Always remember to acquire assets that generate cash flow and you are on your way to financial freedom.

Start now and take action. Do not have the mindset that you do not have enough money, you are not prepared or you do not have time. Take responsibility of your finance!

“As you begin to take action toward the fulfillment of your goals and dreams, you must realize that not every action will be perfect. Not every action will produce the desired result. Not every action will work. Making mistakes, getting it almost right, and experimenting to see what happens are all part of the process of eventually getting it right.”

Jack Canfield

Trade Opportunity: Hewlett-Packard Company (HPQ:US)

Hewlett-Packard Company is an American multinational information technology corporation headquartered in Palo Alto, California, USA. HP is one of the world's largest information technology companies and operates in nearly every country. HP specializes in developing and manufacturing computing, data storage, and networking hardware, designing software and delivering services… read more from Wikipedia.

5 year Chart of HPQ (Click on image to enlarge)

I believe most of you know about the sex scandal revolving Mark Hurd, the CEO of HP during early August which sent the price from $54.75 (52 wk high) down to the current price of $39.19 (around 52 wk low). Down by around 28%. Soon after that, he stepped down as CEO.

The news that brought the price down to its lowest this year after the 2008 financial crisis is actually short-term news. And short-term news is a good buying opportunity as we know that the news will not affect the company in long-term. Read here to learn how to differentiate long-term and short-term news

Fundamental Analysis

Honestly speaking, you don’t really have to bother much about fundamental analysis in the case of trading on short-term news. But it doesn’t kill to know a little?

I am using HP Probook right now and I am very happy with it. Its fast, don’t weigh a ton and the customer service is quite decent. Many of us know or at least heard about the brand, HP. This clearly shows that HP has a strong brand recognition.

This company also has been consistent in their dividend payout. Also, HP posted an 11% revenue jump and a 6% profit increase for its fiscal third quarter. The PE ratio of HP is now 10.91 which tentatively mean it is undervalued. And the ROE is 20.54%, which is considered attractive (more than 15%).

Technical Analysis

2 month Chart of HPQ (Click on image to enlarge)

From the chart, you can spot multiple buy signals indicated by the yellow circles. The price fell after the resignation of Mark Hurd and touched the support line on 27 August. I believe the price is going to head back to the resistance line and that’s your sell signal before plunging down again. And then, I speculate there is a possibility that the price might break below the support.

Conclusion

I would say HP is a good buy at the moment. Sell it once it hits the profit target of around 42 (resistance line). I don’t recommend you short sell it along the way down. But once it breaks the support line, another good buying opportunity emerges.

From the fundamental, you can also buy and hold it for long term. There is a high possibility that HP will eventually go back to their high.

Disclaimer

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